April 15, 2005

Unbearable Finiteness of Oil

On Ezra Klein's sage advice, I'm reading through Paul Robert's The End of Oil in order to make sense of the trends of our times. Apparently we're running out of oil or something? Apparently. One thing I've always wondered, though, is why the price of oil now doesn't reflect what we supposedly know about the future. That is, if this "oil peak" was in fact real and imminent, and people knew about it, then oil traders would go grab up all the barrels of the good stuff they could fine and tuck it under their t-shirts, all in the hopes of making a killing later on when supplies were scarce. And that little frenzy would drive up prices.

Several reasons, from what I can tell halfway through Roberts' (excellent) book. First, there's a lot of slack in the oil markets, which makes it impossible to tell whether or not we've actually hit a peak. For a long while, countries like Saudi Arabia, Kuwait, and Venezuela have been squirreling some of that goo away, so that if production ever does start to sag, they can just unleash some of the oil tucked under their t-shirts onto the market, making it look like everything's just fine production-wise. In other words, these countries can "mask" a peak in production. In fact, maybe they've already hit that peak and are now disguising their dirty little secret. Sadly, we'll only be able to tell long, long after the fact.

Next, the oil market isn't actually a well-functioning machine. (Yes, yes, we all know what I wanted to say just then.) Roberts argues that in a perfectly free market, companies would drill up and sell all the cheap and easy oil first, for cheap. Only when that all ran out would they move on to the stuff that's hard to grub, like those supposed reserves deep under the Caspian Sea, and when they started doing that, they'd raise prices (because they'd have higher production costs). So the cost of a barrel would increase monotonically and tell us when we're running out of oil.

Sadly, that's not how it works. A goodly portion of the easy oil is controlled by OPEC, and they like to limit their output for various insidious (some might say "smart") reasons. So Western companies have had to get that difficult-to-pump stuff all along, which artificially inflates prices relative to supply, means we—meaning "we with blogs"—can't figure out whether we're hitting a peak, or have hit a peak, or are nowhere near hitting a peak, or whatnot. It's an enigma wrapped in a mystery slathered in oily sludge. And the moral is that we should all start walking to work. Yes, even you.